The United States is preparing to take a step that could make it easier for the country’s largest banks to operate.
To understand this, it’s important to look at how the banking system functions. Regulators decide the amount of capital banks must hold to absorb losses, as well as the liquidity needed in case funding suddenly dries up.
More capital and liquidity make banks more resilient, but they also limit lending, trading, or returning money to shareholders. Conversely, lower requirements give banks more room to operate, but the safety buffer becomes thinner during market volatility.
This trade-off is now at the center of U.S. banking policy. On March 12, Federal Reserve Vice Chair for Supervision Michelle Bowman said regulators are preparing to relax the final phase of Basel III rules—the post-2008 crisis capital requirements that Wall Street has been seeking to loosen for years.
The new version could keep capital requirements for large banks the same or even slightly lower after adjustments. This could free up over $175 billion in excess capital across the banking sector. Additional surcharges for the biggest global banks could also decrease by about 10%.
This marks a significant shift from the stance just three years ago.
A previous draft, pushed in 2023 under Bowman’s predecessor Michael Barr, proposed increasing capital requirements for the largest banks by about 19%. Banks argued that such regulations would make credit more expensive, reduce market-making ability, and push financial activity out of the regulated system.
Meanwhile, advocates for stricter rules argued that years of cheap money, concentrated asset portfolios, and repeated financial stresses have made the system need thicker safety buffers. However, the new draft leans more toward the banking industry’s position.
A stark contrast with Bitcoin
Notably, while Washington seems ready to give big banks more flexibility on capital and liquidity, holding Bitcoin directly on a bank’s balance sheet still faces much stricter regulations.
Under Basel rules, high capital thresholds and risk weights can make holding Bitcoin extremely capital-intensive, even if legally permitted. This indicates regulators are more comfortable managing risks within the traditional financial system rather than normalizing Bitcoin on bank balance sheets.
More than just capital policy changes
Easing capital requirements is a big story for banking. But its impact extends further because of another factor: liquidity.
Earlier this month, U.S. Treasury officials said they are reviewing liquidity regulations and proposing to count some pledged assets at the Federal Reserve’s discount window as a form of liquidity.
In simple terms, regulators might start considering emergency borrowing from the Fed as part of usable liquidity. The U.S. Treasury calls this “liquidity that can actually be converted into cash.”
This means banks might not need to hold as many “dead” assets just to meet regulations if they can demonstrate they have pledged assets at the Fed that can be quickly converted into cash. In other words, the system is being redesigned to rely more on the central bank’s backstop.
For years, regulators have tried to build a framework allowing banks to manage crises on their own. They need enough liquid assets to withstand deposit withdrawals, with the Fed’s discount window seen as a last resort.
But in practice, banks often avoid using this tool because borrowing from it signals trouble. The U.S. Treasury now openly acknowledges this “stigma” and suggests regulations should reflect that the tool exists for use when needed.
Lessons from the 2023 regional bank crisis
This shift is especially notable given that just three years ago, the U.S. banking system faced a major shock.
Silicon Valley Bank, Signature Bank, and First Republic collapsed as confidence evaporated rapidly, depositors withdrew funds at unprecedented speeds, and liquidity that seemed sufficient in theory proved hard to mobilize in practice.
The Fed’s report on Silicon Valley Bank highlighted serious weaknesses in liquidity risk management, and regulators failed to recognize the extent of the risk as the bank expanded.
At that time, the official solution was clear: better supervision, better preparedness, and increased resilience of the banking system.
But the 2026 reform proposes a different approach: lighter capital requirements, less strict treatment of pledged assets at the Fed, and fewer restrictions on large banks.
More room for banks to grow
If the new framework is approved, big banks will have more room to expand lending, increase trading activities, buy back shares, and support financial deals.
Supporters argue that this is the goal. Michelle Bowman contends that excessively high capital requirements impose significant economic costs and could hinder banks’ core role of providing credit to the economy.
Industry groups also believe the proposed changes will better align regulatory demands with actual risks.
The trade-offs of the financial system
However, the other side of this change is clear.
Capital regulations act as shock absorbers for the financial system, while liquidity rules serve as safety brakes. When both are relaxed, banks gain more freedom, but the system’s protective mechanisms are reduced.
This means policy is shifting away from maximum safety toward greater efficiency, increased credit growth, and easier access to Fed funding.
The timing of this decision has sparked debate.
Senator Elizabeth Warren warns against loosening capital standards amid rising geopolitical and credit risks. While political, her stance highlights the paradox in this debate.
After Silicon Valley Bank’s collapse, Washington emphasized that banking resilience must come first. But now, amid slowing growth, market volatility, and funding risks re-emerging, Washington appears ready to loosen the operational space for big banks.
The banking system still relies on the Fed’s “safety net”
Essentially, this is about how much “buffer” the financial system should hold before another shock hits.
A stricter framework would force banks to keep more unused protective layers. A softer one accepts higher vulnerability in exchange for more lending, more active markets, and higher profits.
Longtime Bitcoin advocates argue that the traditional banking system heavily depends on emergency support mechanisms, even if outwardly it appears stable and self-sustaining.
The Fed’s discount window isn’t just a technical detail; it’s part of the infrastructure that prevents market confidence from collapsing en masse.
When the U.S. Treasury proposes counting pledged assets at the Fed as liquidity, it also admits that the financial system still relies on the central bank’s rescue architecture, even during “normal” times.
A new crisis hasn’t yet occurred, but Washington is rewriting the post-Silicon Valley Bank rules. The practical assumption now is that during panic, big banks need more flexibility and the Fed’s safety net should be easier to access.
For Wall Street, this is clearly a significant relief.
For the rest of the economy, it’s a reminder that the banking system still revolves around a familiar issue: private risks operate most efficiently when public liquidity is always ready behind the scenes.
